Writing about random topics

What do people mean when they say that their home is an investment?

The other day the wife asked me a question: what do people mean when they say that their home is an investment?

I said that people buy a house and make payments on it, and at the end of the loan period, the house has appreciated in value. You take the price it is worth then and subtract what you paid, and you’ve made money. For example, if you buy a house for $200,000 and then sell it 30 years later for $400,000, you’ve doubled your money.

Or have you?

I did the math on this. In order for you to make money, you have to subtract all of your costs. Let’s assume the following:

This means that over the course of the lifetime of the loan, you will have paid $167,860 in interest for a total cost of $367,860 (principal + down payment + interest). This means that for your home to be worth that much, your house has to appreciate 2.1% per year for 30 years. That’s not too bad.

But hold on a second, that’s not the total cost of your home. If you toss in property taxes, which I estimate at 1% per year, then over 30 years you will pay $427,860. To break even, your property must appreciate 2.6% per year.

But hold on a second, if you toss in homeowner dues (for a condo) of $300 per month, you will pay $535,860. To break even, your property must appreciate 3.3% per year.

But hold on a second, if you toss in yearly maintenance, which I estimate at 1% of the property value, then over 30 years you will pay $595,860. To break even, your property must appreciate 3.7% per year.

This means that in order for you to make money on your purchase of a house, your property must go up in value 3.7% per year. What is real estate’s historical rate of appreciation? About 4%. This means that your investment returns a measly 0.3% per year. That’s worse than a savings account.

The reason to buy a house is not because it’s a great investment; the reason to buy a home is because you want some place to live and call your own. And do whatever you want to it. It’s perfectly fine to own a home.